30-Year Vs. 15-Year Mortgages

by Chris Joseph

One of the most agonizing decisions associated with buying a home -- besides figuring out where to hang your partner's hideous clown painting so that nobody will see it -- is whether to take out a 15-year or 30-year mortgage. Each presents some significant advantages and disadvantages that can make the decision difficult. Examine the pros and cons closely to make the right choice.

The 15-Year Advantage

Obviously, with a 15-year mortgage you'll be out of debt much faster, perhaps even by the time your kids are grown and ready to fly the coop. This means that you can spend your middle-age years taking exotic vacations or lavishing each other with fancy gifts. Interest rates for 15-year mortgages typically are lower than for the 30-year variety, so you can save a bundle in interest over time.

The 15-Year Disadvantage

On the other hand, your monthly payments may be significantly higher with a 15-year mortgage. If you plan to have a family, the higher payments can leave you financially strapped. As an example, a 30-year mortgage for $250,000 at five percent interest would result in monthly payments of $1,342.05. With a 15-year mortgage at the same rate, your payment would soar to $1,976.98. In many cases, qualifying for a lower interest rate may be the only way a 15-year mortgage is viable.

The 30-Year Advantage

Perhaps the biggest advantage afforded by the 30-year mortgage is the flexibility it can provide. Because your monthly payments are lower, you might be able to prepay the mortgage by sending additional payments as your budget allows. By making prepayment a regular practice, you can significantly reduce the term of your mortgage without locking yourself into the larger payments of the 15-year loan. You could also elect not to prepay and use the money to fund your retirement or your kids' education.

The 30-Year Disadvantage

If you're currently in your 20s, the thought of making mortgage payments into your 50s may conjure up visions of walking canes and hearing aids. While it may not be quite that bad, 30 years can be a long time to be "stuck" making mortgage payments. If you're not disciplined enough to use the savings for prepaying your loan or investing wisely, you won't reap the benefits of the 30-year mortgage.